Private Equity

Refusing to Accept Defeat

Charles BlackmonSenior Vice PresidentKrauter & Co., Chicago

Charles Blackmon had a private equity client whose lender refused to renegotiate the loan covenants of a note worth more than $150 million, and called the loan — prompting the PE firm to consider filing Chapter 11 to avoid having to pay what it felt were unreasonable terms. While the day of reckoning was 60 days away, the firm’s directors’ and officers’ insurance program renewal was immediate. Primary and excess carriers were leaning toward walking away from the client altogether, but that was not an option for Blackmon.

Blackmon, then with Equity Risk Partners, hosted numerous calls with the lender, lender’s counsel, lender’s broker, the PE firm and the underwriters. Blackmon convinced the lender and its advisers that it was in their best interest to avoid forcing the PE firm to file Chapter 11, and to write a waiver of any litigation against the company and board — which then convinced underwriters not to walk away.

“Charles Blackmon is extraordinarily professional — he knows his business cold,” a client said. “He makes outstanding presentations and returns calls immediately. He does painstaking research on everything he does and he follows up.”

“We have a very tricky corporate structure here and Charles Blackmon has been very helpful in getting more reasonable coverage and solving problems for us,” another client said.

“Charles Blackmon has provided superior service,” another client said. “We’ve had a couple of claims this year and he did a great job going to bat for us.”

A Diligent Approach

David GarrettManaging DirectorWortham Insurance, Houston

David Garrett has a foreign-based private equity client that raises money in the United States to invest in portfolio companies in its home country.

The firm’s former chief executive officer pleaded guilty to a “pay-to-play” scandal involving several state pension funds and ended his relationship with the firm.

Though much of the litigation is over, Garrett and his team picked up the account, post-scandal, and have worked closely with the firm to maintain continuity with the carriers on the original claims.

While annual renewals continue to be challenging due to the firm’s previous designation as a “distressed” financial institution, Garrett is able to continue providing the firm with a well-written program backed by several key U.S. insurance companies.

“This past year was a pretty tricky renewal with our directors’ and officers’ liability insurance, as there were some complicating factors because of our complex corporate structure,” a client said. “David Garrett took the time to understand some of the more sensitive issues, and worked very hard to educate the underwriters on the issues. That saved us money — we had an increase, but it would have been a bigger increase had he not taken the time to get the best resolution.”

“David has always done a really great job for us,” another client said. “He has a good relationship with the marketplace and is able to accomplish great things for us.”

Going to Bat for Beleaguered Clients

Neill HarmanSenior Vice PresidentMarsh, London

Last year, Neill Harman masterminded a major client renewal in circumstances where there was a rapidly deteriorating claim. While the insurers sought to revise their renewal terms on three separate occasions, Harman ensured that the client was able to resist the insurers’ wish for a blanket exclusion going forward and to avoid an additional premium clause in the event of further related claims.

Another long-term client congratulated Harman for assuming wide-ranging responsibility in the negotiation of the firm’s 2013 insurance program, involving the client only when critical decisions needed to be made. Harman also provided effective advice in the context of negotiating a claim matter. The client reinforced its satisfaction by awarding Marsh a bonus on top of the agreed fee.

Harman has also been active in advising a leading professional association and clients in the implementation of the new European Union’s Alternative Investment Fund Managers Directive.

“Neill Harman has done a terrific job helping us professionalize our approach to insurance,” a client said. “Prior to him, we relied on the broker to tell us what we needed, but Neill has worked really closely with us, to get us to tell him more about how and what we were actually doing, so that he could deliver a much better product to us.”

“Neill has saved us tens of millions of dollars, not just in premiums, but also in helping contain costs despite very large claims,” another client said.

Crushing It

Matthew HeinzManaging DirectorAon, New York

In 2013, Matthew Heinz placed a policy limit in excess of $300 million — a record in the private equity space — for a seller in a transaction valued at more than $2 billion.

The seller was required to have an insurance policy that would backstop their indemnification obligations in order to sign the acquisition agreement.

Despite the difficult terms and large limit required, Heinz got the coverage bound for the client on a very compressed timeline — including the bulk of Memorial Day weekend — and within budget. He was informed by both the client and the investment bankers on the deal that had the insurance not been placed, the deal would not have closed.

“Heinz is an extremely competent and knowledgeable broker in the reps and warranties field,” said Ira Weisman, managing director at Cerberus Operations and Advisory Co. “He has done a number of deals for us and is very reliable.”

“We needed to get a reps and warranty policy in place in about a week’s time to close a deal, and they just absolutely crushed it — jamming ’round the clock,” said Michael LaSalle, a partner at Shamrock Capital Advisors. “They got the buyer comfortable with it and we were able to close.”

“Matt helped us out with a difficult situation with a client, and helped spearhead the efforts and put pressure on some of the carriers to eventually get the covers we needed for a transaction,” a client said. “He was a good advocate for us.”

Broker Innovation Helps Seal the Deal

Michael O’BrienSenior Vice PresidentAon, Chicago

An investment bank prospect was advising a seller in a deal, in which the buyer required a representations and warranties policy that was considered too onerous by the seller. Not only was the seller under a very tight time frame to execute the transaction, but the amount of limits required by the buyer were exceedingly high. This combination of time frame and limit size made the transaction complex and difficult.

Through teamwork and strength in the marketplace, Michael O’Brien provided the seller a representations and warranties policy to backstop the deal, allowing it to go through. It was the largest reps and warranties deal in Aon’s history and resulted in the investment bank formally introducing the concept to more of its clients.

“Michael has really done an excellent job solving problems for us,” said Kent Swanson, chief financial officer at Newcastle Ltd. “We’ve been working on an area new to us, but not new to Michael — a $100 million construction project. He was able to assist us with an owner-controlled construction insurance policy, a builders’ risk policy as well as a subguard policy and a bonding program to ensure against bankruptcy and performance of the contractors. It was a pretty complex structure of insurance, and Michael and his team handled that very efficiently.”

“Michael O’Brien is excellent,” another client said. “He really assembled a good team for us, and he comes up with creative solutions. We have some pretty complex stuff here and he’s always been extremely helpful in guiding solutions that not only are cost-effective, but make sense for our risk profile.”

Top Negotiator Powers Through Roadblock

Jeffrey Rubocki, RPLUSenior Managing DirectorKrauter & Co., Chicago

Last April, Jeffrey Rubocki helped resolve an impasse between a buyer and a seller regarding the indemnification provision for the representations and warranties in an acquisition agreement. The seller was private equity-backed with financial difficulties, and the buyer was not convinced that the seller and/or its owner would be able to indemnify it if a future breach of a representation or warranty occurred. As such, the buyer demanded higher-than-normal escrow, but the seller could not afford it.

Rubocki, who moved from Equity Risk Partners to Krauter & Co. in November, went to the transactional market and put in place a sell-side representations and warranties policy that would cover any breach of a seller representation and warranty in the acquisition agreement. After much negotiation, the buyer was willing to accept the policy in lieu of a large escrow and thus was comfortable with moving forward on the deal. It was because of the manuscript insurance policy that Rubocki was able to put in place on behalf of the seller that the deal was able to eventually close.

“I think that he is one of the most incredibly diligent brokers,” said Jay B. Spievack, a partner at Cohen Tauber Spievack & Wagner. “He knows how to represent the interests of his clients to maximize their chance to get insurance coverage, or when there is a large claim that could affect the company’s business. I think he gives total devotion to his clients.”

“Jeff Rubocki goes way beyond the call of duty,” another client said. “He has helped me out on several occasions without an expectation of anything in return.”

Ask the average citizen what they think about the future of U.S. manufacturing, and you’re likely to hear bleak projections of companies shipping their operations offshore, or robots displacing human workers. Overall, the industry’s public image is fading at the edges — people perceive waning relevance and opportunity.

“But if you ask manufacturers what they think, the response is the exact opposite. U.S. manufacturers are actually quite enthused about the future,” said Seth Hedrington, Senior Vice President and General manager, National Insurance, West Division, Liberty Mutual Insurance. “It’s a very dynamic industry with new opportunities every day.”

Advancements in technology are changing the game in terms of capabilities, efficiency and agility.

“Automation and robotics enable smaller entities to produce at a smaller scale, which puts pressure on every player to become more efficient,” Hedrington said. But additional, less publicized

technology is also making a big impact. The Internet of Things, blockchain, and 3D printing, to name a few, are lowering barriers to entry and enabling companies to move into new markets more quickly.

Seth Hedrington, Senior Vice President and General Manager, National Insurance, West Division, Liberty Mutual Insurance

Thanks to these developments, technology is driving competition. However, its benefits are simultaneously counteracted by the challenge of keeping up with rapidly-changing consumer preferences, government regulation, and an ongoing labor shortage.

The result is an environment teeming with both opportunity and obstacles. “Manufacturers have to make changes to stay in the game, but that introduces new risks,” Hedrington said.

Here are five ways manufacturers are reacting to a newly competitive environment that may expose them to unforeseen risks:

1. Stretching an existing workforce to combat a shortage of qualified workers.

The inability to attract and retain workers remains a top challenge for manufacturers, in part because the nature of the skill set required is changing rapidly. Because technology plays such a significant role in front-line production processes, manufacturers need people who not only operate the machines, but also understand how they work.

“They need workers who are more adept with technology, and that’s harder to come by,” Hedrington said.

To increase capacity, companies are lengthening or adding shifts for their existing workforce, which increases the likelihood of fatigue and the risk of injury. While co-bots may reduce labor demands and mitigate safety risk over the long term, they too present short-term challenges.

“Introducing new machinery or even new workers creates unfamiliarity, and that initially increases safety risk,” Hedrington said.

These changes also have product liability implications. “When you extend shifts, you’re taxing the equipment as well as your workers,” Hedrington said. “That makes it more difficult to achieve a consistent level of product quality.”

Thanks to recent tariffs on key imports like aluminum and steel, raw materials are becoming more expensive. “Manufacturers are faced with some of the most extreme fluctuations in the cost of materials that we’ve seen in recent history,” Hedrington said.

To control costs, some companies are turning to suppliers from regions not impacted by the tariffs. But significant risks always accompany a change in trade relationships. Product defect liability is chief among them, but the risk of supply chain interruption is also an issue.

“If you’re working with alternate suppliers and relationships are not as established, the risk of interruption is greater,” Hedrington said. Failure to deliver products on time ultimately presents a reputational risk and threatens a manufacturer’s ability to keep their contracts.

Risk Management Steps:

Maintain relationships with previous suppliers.

Develop contingency plans and a network of backup suppliers.

Review contract language addressing liability for faulty materials.

3. Diversifying operations to become more nimble and fast-paced.

Technology makes it easier to stay connected anywhere in the world, and more manufacturers are taking advantage of that to open multiple locations across the U.S. and abroad.

“As companies start to feel pressured by the competitive environment, they’ll look for opportunities to manufacture in other parts of the world where regulatory hurdles and costs are smaller,” Hedrington said.

That, however, may increase exposure to intellectual property (IP) theft. While cyber breach happens everywhere, an international supply chain typically means a more expansive network, so the potential for infiltration and IP theft is greater. The ability to seek damages for IP theft occurring outside the U.S. can also be more challenging.

“A global network is a lot more difficult to manage—you need to regularly evaluate who has access, what they have access to, and make sure the access is secure,” Hedrington said. Limiting access to confidential information to specific groups or a specific location, like a U.S. headquarters, could help mitigate the exposure.

Risk Management Steps:

Add language to contracts that protect proprietary and IP rights.

Limit research and development to company headquarters.

Review internal IT protections.

4. Making facilities “smarter” to improve production and output.

More manufacturers are incorporating sensors and internet-enabled technology that allows machines to collect and share data and work together in an automated fashion. This ‘smart’ technology provides valuable insights into the efficiency of production processes.

“The risk associated with “smart” machinery is their interconnectivity,” Hedrington said. “Anytime you have that level of connectivity, you have an increased level of risk to cyber breach.” It’s also easier to make unintentional or unauthorized changes to product design and specifications or material thresholds, which could impact product quality and safety.

“Many manufacturers don’t perceive themselves as major targets for cyber-attack, but failing to appreciate and mitigate that exposure can result in significant losses. In addition to reviewing your internal IT safeguards, it’s critical to review your insurance options. If you’re not considering the benefits of insurance, that’s a significant missed opportunity to protect your business,” he said.

Risk Management Steps:

Update your cyber policy to include both first- and third-party coverage.

Manufacturers in a variety of consumer product segments, from razors and eyeglasses to mattresses and sneakers, are increasingly exploring direct to consumer models that cut out the middle man. While few manufacturers are abandoning their traditional distribution outlets all together, they are considering e-commerce and even brick-and mortar locations of their own.

In addition to increased efficiencies, this format allows manufacturers more control over the customer experience and a bigger share of the profits.

“Going direct-to-consumer is another way to beat out competitors,” Hedrington said. “Technology and the connectivity of everything has helped open up new distribution avenues.”

It also, however, confers liabilities to the manufacturer that the middle-men normally accept, such as product and safety liability for proper packaging and labeling, as well as other operational risks that come with running a storefront, including workers’ compensation, cyber, property and general liability exposures.

Risk Management Steps:

Don’t completely shut down traditional distribution channels.

Ensure you have the skills to manage operational risks of direct distribution.

Build a cross-functional team to build a thorough risk management plan.

Your Insurer’s Experience and Expertise Matter

Manufacturing represents one of the largest business segments that Liberty Mutual serves, and teams across the organization have specialized expertise in the unique challenges facing this evolving sector.

Liberty insures a wide variety of manufacturers, wants to write more, and has the products to address the industry’s specific exposures. The company can offer a holistic solution that includes core property & casualty, as well as cyber, D&O, and environmental lines through Ironshore, a Liberty Mutual company.

“Liberty Mutual is entrenched in the risk management practices of the manufacturing industry. Our risk control professionals participate in many boards and committees that create standards to improve equipment, product, and employee safety. Additionally, our Industry Solutions and Product Management teams have a deep understanding of the manufacturing industry and help customers stay ahead of emerging risks,” Hedrington said.

In addition, Liberty’s claims handlers have the experience, capabilities, and knowledge to deliver quality outcomes so manufacturers can rebound from losses as quickly as possible.

“Our commitment to this space manifests itself in many ways, and that will hold true as U.S. manufacturing continues to evolve,” Hedrington said.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.

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